Entrepreneurs Relief – The Turning of The Tide
Over the years, when speaking to some clients and asking them about their existing pension provision, some have responded ‘my business is my pension’. This was always a fairly speculative position to take because there is no guarantee of being able to sell the business for what you believe it to be worth, or there being a demand to buy the business at the time you would like to retire.
Entrepreneurs Relief was certainly a benefit for this approach as the rules allowed business owners of two years or more to pay less Capital Gains Tax (10% rather than 20%), when they sell their business, up to a lifetime limit of £10million. However, in the Chancellor’s budget on 11th March 2020, he announced that he would be reducing the lifetime limit to £1million immediately with limited transitional arrangements.
How Does Entrepreneurs Relief Work?
To summarise, Entrepreneurs Relief results in a tax rate of 10% on the value of the sale of the business. There’s no limit to how many times you can claim, however, from 6th April 2020, you can only claim up to £1 million of relief during your lifetime.
You have to meet other criteria too for Entrepreneurs Relief to apply.
What does this mean?
Prior to the reduction, business owners could have had a primary focus, which was to grow the value of their business as much as possible prior to selling the business for as much as possible, possibly to retire?
The change in rules effectively means, business owners may now need to reconsider their options and start to take advantage of planning opportunities available to them in order to maximise the value they get out of their business now, prior to the eventual sale. Your options could include the following:
- Maintain a ‘lifestyle’ business for the long-term;
- Maximising pension funding;
- Investing surplus capital; or
- Paying a higher level of salary or dividends
- Invest proceeds in a tax efficient manner
- Using a core business to build a network of ‘family’ satellite businesses
If you are a business owner and you would like to know more about the changes in Entrepreneurs Relief and how this will impact you and your plans, please do not hesitate to contact us.
In the meantime, keep healthy and safe.
Carl Mitchell – DipPFS
IFA and Paraplanner